Skip to main content

LMDS Auctions Could End Up Disappointing Congress, FCC

The contour of the local multipoint distribution service
auctions shifted dramatically last week, with a revised -- and drastically reduced -- cast
of bidders that raised questions of whether the outcome would meet expectations at the
Federal Communications Commission and on Capitol Hill.

Gone were several companies that had initially signaled
intentions to bid, including Comcast Corp. and RCN Corp. Also absent were several smaller
designated entities, including CellularVision USA Inc. and WebCel Communications,
resulting in a decline in the total number of bidders, from 190 to 139.

Among the companies that did step up were Adelphia
Communications Corp., direct-broadcast satellite distributor EchoStar Communications Corp.
and wireless cable operators American Telecasting Inc., CS Wireless Inc. and People's
Choice TV Corp.

Capping the list of bidders was WNP Communications Inc.,
which is backed by several major venture-capital firms, including Chase Manhattan Venture
Fund of New York, Norwest Capital, Providence Ventures of Rhode Island and others. WNP
qualifies for a 45 percent bidding discount as a designated entity because its revenues
averaged under $15 million annually over the past three years.

Former Providence Journal Co. president Trygve Myhren is a
controlling principle in WNP.

WNP, at $100 million, paid twice as much as the entity
paying the next-largest sum. That was $50 million deposited by NextBand Communications, a
start-up affiliate of Nextel Communications Inc. and NextLink Communications Inc., in
which cellular pioneer Craig McCaw is the dominant shareholder. NextBand does not qualify
for a discount.

Other top bidders and the discounts that they qualified for

BCK/RNGAM LLC ($33 million/45 percent), an entity
controlled by venture-capital-fund manager Mario Gabelli;

PCTV Gold ($20.25 million/35 percent), an affiliate
of PCTV;

Cortelyou Communications ($20 million/none), an
affiliate of CoreComm Inc.; and

WinStar LMDS LLC ($13 million/25 percent), an
affiliate of 38-gigahertz wireless operator WinStar Communications.

Two regional Bell operating companies, U S West
Communications Inc. and SBC Communications Inc., hung in -- paying $5 million and $3.8
million, respectively -- despite a U.S. Appeals Court ruling against their plea to have
the ban lifted on telco ownership of A-block spectrum within their territories.

Cable operators are also banned from in-territory LMDS

But Adelphia, doing business as Baker Creek Communications
L.P., put in an upfront payment of $10 million. EchoStar took a minority stand in a
partnership, Alta Wireless Inc., for $6.2 million, and ATI put up $3 million.

The bidding for 1.3 GHz of LMDS spectrum is slated to get
under way Wednesday (Feb. 18), and it is expected to last several weeks.

Providers will be able to use new radio technology to
deliver two-way services of every description on a point-to-multipoint basis across cells
measuring three to six miles in diameter.

CellularVision, WebCel and other start-ups that have been
attempting to raise capital for the auctions pulled out after finding that there
wasn't enough support within the investment community for their participation.

Some of these companies charged that they were forced into
this situation because of the FCC's rules for determining which companies qualify for
discounts. They said those guidelines were so 'fuzzy' that it made it easy for
venture-capital firms to qualify as discount bidders themselves, rather than backing
entrepreneurial concerns that qualified as designated entities.

'By establishing revenues as the sole criterion for
qualifying for discounts, rather than including assets, the commission has made it
difficult for the very types of entities that were intended by Congress to qualify as
designated entities to participate in the auctions,' said David Mallof, president of
WebCel, which has asked the commission to delay the auctions.

Moreover, Mallof said, the absence of entrepreneurial
entities with strong capital backing, combined with the failure of major
telecommunications entities such as AT&T Corp. and WorldCom Inc. to show up for the
auctions, has set the stage for a potentially disastrous showing.

WebCel's petition for a delay wasn't the only
factor posing a potential problem for the LMDS auction. The United States Telephone
Association, reacting angrily to the U.S. Appeals Court ruling, said it would 'use
every means possible,' including court appeal and action from Congress, to overturn
the telco ban.

A spokeswoman confirmed that the USTA would appeal the
court ruling. She also said the organization would seek Congressional involvement, but she
declined to provide details of its Capitol Hill strategy.

One key gauge of how uncompetitive an auction will be,
Mallof noted, is the amount of prepayments submitted by bidders according to a per-POP
(unit of population) formulation that starts at 90 cents per POP for the biggest BTAs
(basic trading areas) and that goes down from there.

The total of all prepayments for the A (1.15-GHz) and B
(150-megahertz) blocks nationwide was $357.9 million, which is only 1.74 times the minimum
prepayment total of $205.7 million required to cover every POP. This means that
prepayments don't add up to at least two bidders per block, per BTA.

'This ratio suggests that some markets won't be
competitive at all,' Mallof said. 'In addition, 62 percent of all upfront
payments were made by the top five, which means that the bidding will probably be strongly
skewed among a handful of players.'

FCC officials have previously indicated that bidding could
top $4 billion and that a minimum of $2.4 billion would be needed to ensure a successful
auction. But the absence of strong competition could lead to substantially lower bidding

Not everyone, however, believes that the shift in the
bidding lineup will produce that outcome.

'I think that we're going to see a successful
auction, even if some of the smaller players aren't in,' said Shant Hovnanian,
CEO of CellularVision.

He said his company opted not to bid when it realized that
it could do far better for its shareholders by playing a role as an integrator of LMDS
systems nationwide, building off its operational experience in the New York metropolitan
region, where it holds a special 10-year license that was granted last year.

'There's going to be a need to tie LMDS systems
together to facilitate their ability to provide high-speed data and other services,'
Hovnanian said. 'We're talking with a lot of people about providing that kind of

There is also a strong possibility that companies such as
WebCel and CellularVision will be able to become LMDS operators under management
agreements signed with venture-capital entities that win spectrum. But Mallof said the
creation of management teams and other maneuvers permitted under the liberal partitioning
rules of LMDS could significantly delay the launch of services.

Bell Communications Research, in a new study of the market
potential of LMDS, said an operator could get service under way in a midsized city within
nine months of receiving its license from the FCC. Because of the low cost of
infrastructure, LMDS could generate 'net profit margins exceeding 30 percent'
within six to seven years, the report said.

The study underscored the extent to which the market
appears to be underplaying the LMDS potential. At a moment when major players of every
description are looking for a way to get into the local-access market, LMDS offers the
lowest-available facilities-based means to do so, with the potential to connect over 99
percent of all homes and businesses to high-speed-data, video and voice services, Bellcore

One entity clearly in tune with the potential is Teligent
LLC, the holder of licenses nationwide at the 24-GHz spectrum tier, which has filed to
participate in the LMDS auction as AUCO Inc., with a prepayment of $5 million.

Teligent, with a market valuation of over $1 billion,
qualifies for a 35 percent discount as a designated entity in the LMDS auctions.

Ted Hearn contributed to this story